Special Situation in ABG Shipyard

ABG Shipyard will cease to trade from 29th June,2012. The open position in June series of derivatives segment will get closed on 28th June, 2012. The open position of ABG Shipyard in June futures is almost 28,40,000 shares. 

What is the big thing in it  ?

a) ABG is in Banned category since 6 months.

b) There is no speculative interest in it , because it was in banned category.

c) Since last three expiration, The cost of carry of rollover was almost 1.75 % compared to 1% for market.

Based on this rationale, we can infer that most of the open position in ABG is of long and the shorts are only the arbitragers. Also it seems the long may not have alternate source of funds to rollover the position in cash market.

We can assume that the arbitragers will come in cash market to liquidate the position which they are holding against their short in derivatives segment. If during VWAP period tomorrow, if there the buyers for ABG don't enter the market, there can be heavy liquidation leading to big fall in price.

What is the Strategy ? 

Short this counter and wait for price movements (CMP 373/- ) with a stop loss of Rs 385/-

Can Something go wrong ?

a) Yes as this is a directional view, the price of ABG can go up, but looking at the price movement in stocks it looks unlikely, moreover u can trigger stop losses also.

b) As for fundamentals go, It is not available cheap. It has huge debt and the business in also in downward cycle.

This perception of fall is based on view that there are long in this counters, would would be forced to liquidate.

This is not a recommendation to anybody whatsoever to buy or sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions

Special Situation in Aban Offshore

Today, I came across a special situation in Futures price of Aban Offshore. Aban Offshore is trading in banned category, i.e you cannot create new open position in this segment (Or you have to pay the penalty).

The price of Aban in Cash Market was Rs 351/- whereas in derivatives market, it was trading at Rs 313/-. We can say there is backwardation of Rs 38/-. There is no dividend in the stock.

Then why is there a huge backwardation, It seems the backwardation is because of heavy shorts in the stock and no player can buy the stock in derivatives because of ban. Can we identify the opportunity ?

Yes, very simple buy Aban in June series. I agree it is in ban and you cannot create new position, but u can do that by paying the penalty which is 1% per day of contract amount.

The contract is expiring on Thursday, So if you buy on Tuesday, you will have to pay penalty for 2 days which will come to Rs 6.20/- , that means if you buy at LTP of 313 your cost of purchase will increase to 319.20. Still it is at a steep discount of almost 9 %. On Thursday the price has to converge and if they converge at mid point, then also there is money to be made.

What can go wrong ?

This not an arbitrage bet, but it is a direction bet that Aban price in cash will not fall drastically. The loss will start if price in cash market falls below 320/-, it is a high beta stock, but we can take solace that 52 week low price of this stock is 320.10. Hence we can safely say that risk reward is in our favor.

Moreover the backwardation up-to yesterday was only Rs 23/-.

 

This is not a recommendation to anybody whatsoever to buy or sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions

Riddhi Siddhi Gluco Biols Ltd (RSGBL)

Riddhi Siddhi Gluco Biols Ltd is India's largest starch and starch derivatives company with about 25% market shares. The EPS for FY 2011 was Rs 147.22, which should come down to Rs 20 to Rs 25 depending on the loss of March,2012 quarter. 

Roquette Freres, one of the largest Starch Company in the world holds 14.93% stake in Riddhi Siddhi Gluco Biols Ltd. It has entered it to arrangement with Roquette Freres to sell its starch business for Rs 985 crores.

As per scheme of arrangement of Riddhi Siddhi Gluco Biols Ltd, RSGBL will transfer all its Starch business and its factories in a subsidiary M/s Riddhi Siddhi Corn Processing Private Limited (RSCPPL). Under the said scheme the manufacturing units of RSGBL at Viramgam, Gokak and Rudrapur would be transferred to its subsidiary Company M/s Riddhi Siddhi Corn Processing Private Limited (RSCPPL). Roquette Freres will make an investment to acquire majority stake of RSGBL in RSCPPL, with further option to buy all the shares held by RSGBL in RSCPPL, and as part of the Scheme RSGBL will reduce it's paid up capital to the extent of shares held by Roquette Freres (around 14.93% of the present paid up equity). This is subject to approval of the Shareholders, Creditors and concerned authorities.

http://www.bseindia.com/stockinfo/anndet.aspx?newsid=df6ab1d2-f16c-4567-9e80-8ed74b0758fe

The scheme of arrangement is approved by Gujarat high Court on 2^nd may, 2012 and the order is received by the company RSGBL on 31^st May, 2012.

As things stands

a)  The corn business of the company is transferred to RSCPPL.

b)     It will get Rs 985/- crores  form Roquette Freres for sale of RSCPPL

c)     New Equity of RSGBL is 94,78,300 shares as the stake held by Roquette Freres stand cancelled in the company.

d)     Based on Interest cost in quarterly reports, we can assume that the company has a debt of Rs 175 crores to 200 crores.

e)    The company will have to pay capital gains tax of almost 20% without considering indexation.

Based on above facts, the company will have cash of almost Rs 588 crores (After paying taxes and all debts) in hands, which converts into Rs 620/- per share.

The company is left with loss making wind power business, where it has already invested sizable amount and intend to invest more.

It has also indicated to handsome dividend to shareholders to rewards shareholders for the sale of its subsidiary (Please refer its Annual report of FY 2011)

http://www.bseindia.com/bseplus/StockReach/StockQuote/Equity/Riddhi%20Siddhi%20Gluco%20Biols%20Ltd/RIDDHI/524480/CommodityChemicals

http://www.riddhisiddhi.co.in/pdf/Riddhi_Siddhi_Brochure.pdf

It current market price is Rs 255/- which is almost available at a discount of 60 % to its cash in the company. In recent times cash in books are not valued at par and are often available at a discount, it is true for many well know companies as is true for RSGBL.

Why Should I invest in the company?

a) My rationale for investment is the company is dividend stripping and it will be huge, Based on cash balance in the company, its statement in Annual Report about Special dividend has given comfort that it will give special dividend. I perceive that the dividend should be around 25% of cash value in the company, which will be almost Rs 150/-.

b)As and when the transaction takes place (almost 3 months), the company will declare dividend and the stock will be Re -rated.

c) There is a well known financial wizard, who is known for investment call is an investor holding 1,50,000 shares in his personal capacity.

After the dividend is distributed, it will be left with almost Rs 450/-per share and Cost of that will be Rs 104/- (254 – 150). (Forget the tax planning part by getting Rs 150 as tax free and also claiming short term loss).

I am convinced that stock will be Re - rated as soon as the dividend is declared and we can expect a return of more than 20%.

PS: Riddhi Siddhi Gluco Biols Ltd and Riddhi Siddhi Bullion are not related entities , though both of them are based in Ahmedabad.

Put / Call Ratio at the end of 13/06/2012

Today I came across glaring discrepancy in Put / Call ratio published by NSE. Take a look at it.

Home > F&O > Market Information > Historical Data > Business Growth in F&O Segment> Jun 2012
Daywise Turnover
Jun-12
Date	Index Futures		Total
	No. of contracts	Turnover	Put Call Ratio
		(
		cr.)
01-Jun-12	444173	10077.83	1.01
04-Jun-12	441058	9889.04	1.03
05-Jun-12	400019	9094.9	0.91
06-Jun-12	520113	11954.02	0.99
07-Jun-12	427933	10046.77	1.06
08-Jun-12	538746	12674.99	1.06
11-Jun-12	466961	11139.51	1.14
12-Jun-12	571735	13675.23	1.12
13-Jun-12	447577	10799.2	0.95

It mentions that the Put / Call ratio is 0.95 , the Put/Call ratio as on close of 12/06/2012 was 1.12. Does it mean anything ?

It would be normal on the day of expiration, such a massive change in ratio in middle of the month is worth looking. For a P/C ratio to fall, it denotes that huge put positions are liquidated or huge longs are created or both. Such change can be decisive for traders as liquidation or creation of longs of such scale denotes huge Expected volatility in underlying or a trade by informed traders.

To take a further dig in the ratio, I went to dissect, what has changed. ?

I was surprised to see no big change in OI (Open Interest) in Call or Put. The OI has increased in both calls and Puts. The change in open interest in Puts are more than change in open Interest of Calls.There lies the big question how can the Put/ Call ratio fall ? ???

It would need a different dissection in NSE reporting but let us take the figures at face value as of now and look for interesting outcomes of market in coming day.

Is there an Opportunity in Welspun Global ?

There is a merger proposal between Welspun India and Welspun Global; The Board has decided that Welspun Global Brands will be merged in Welspun India.  The merger ratio decided by the board is 1:1.

http://www.bseindia.com/stockinfo/anndet.aspx?newsid=e504ac47-af9e-4e91-a9ab-ff7a7f0b1623&param1=1

Looking at results of Welspun India and Welspun Global, We can safely say that Welspun Global results are dismal and they are loss making 

Ratios (2011- 2012)	Welspun India	Welspun Global
Sales (Cr )	2590.99	2482.58
Net Profit (Cr)	121.45	(77.93)
EPS (Rs)	13.65	(74.39)

These results are strictly not comparable because the purchases made by Welspun Global are from Welspun India, essentially Welspun Global is a marketing arm of Welspun India.  There can be issues of transfer pricing.

Merger of both companies can effectively eliminate the issues of transfer pricing.

Also Promoters of M/s Welspun India are buying shares of Welspun India from open market. They have already informed to Exchanges their intention to buy 50,00,000 shares of Welspun India up to price of Rs 54/- from open market.

Along with that they have made open offer to buy 26% public shareholding of Welspun India.

http://www.bseindia.com/stockinfo/anncomp.aspx?scripcode=514162%20&type1=1

Investment Rationale : It would be a good bet to buy Welspun Global Brands at CMP of 36.50/- as derived price based on stock price of Welspun India should not be less than Rs 50/-. This rationale is based on merger ratio between the companies at 1:1.

What can be pitfalls in this trade?

    a) The price of Welspun India can fall in market: True, the price of Welspun India can fall in market, but that may not happen because the promoters are buying from open market and also there is an open offer to buy shares at Rs 54/- by the promoters.

    b)The merger proposal between Welspun India and Welspun Global may not go through: There is a probability that the merger or merger ratio accepted by the Board of Directors can be rejected by shareholder. Welspun Global share holder would not oppose the merger as it is beneficial to them, Shareholders of Welspun India may oppose the deal but promoters are already holding 46.50 % stake, They will buy additional 5.50% stake from the market and 26% from open offer taking their stake to more that 75 % depending on the shares tendered in open offer. Hence we can safely assume that merger proposal will through.

    c)Can court reject the merger: Yes the court can reject the merger if it is not in general interest of the public, but if the mergers are approved by shareholders of both companies in court convened general meeting, Most of the time they accept the merger.

    d)How much time would the merger take?  : These process of mergers will take almost 6 months    to 7 months.

Overall it seems that merger will go through and prices of both companies will align.

 

This is not a recommendation to anybody whatsoever to buy or sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.